April 09, 2017

A Rs 200 Crore Piston Maker

In this post, we look at the prospects of a Hyderabad based piston maker whose client base includes names such as - Honda, Bajaj, TVS, Piaggio, Hero, Tata Motors, etc.

SAMKRG Pistons & Rings is a manufacturer of pistons, piston pins, piston rings and circlips for the automotive market. The company has 3 manufacturing facilities - One facility in Hyderabad for pitons, pins and two facilities in Vishakhapatnam for piston rings, pitons and pins. The company's chairman is Mr SDM Rao (Age: 82 Years) and the company was incorporated in March 1985.

Products:
- Piston: The pistons are used in gasoline and diesel engines for LMV, cars, tractors, motorcycles, etc.
- Rings: This product is again targeted at the automotive markets.
- Pins: This product is made from different alloys of steel.

As evident from the above table, the company is operating at a good operating capacity level. Around ~95% of the company's revenues come from the two-wheeler segment.

For FY2016, exports contributed ~ 19% of the revenues and the management aimed at increasing this to ~25% by FY17. The company had spoken of this target in the previous annual reports too but no results are visible on this front yet.

The company spends ~ 0.5% of it's revenues on R&D.

Shareholding Pattern:

For the quarter ended 31st December, 2016 the promoters of the company held ~ 66.88% of the company while the bulk of the remaining portion was held by retail shareholders amounting to roughly ~ 26.85% of the company. There was no significant change in the shareholding pattern over the last 3 quarters.

Financials:

Click to expand - Figures in Rs. Crores

The above table gives a brief financial snapshot of the company's performance since FY 2011.

- Revenues: The revenues have grown at a 3 Year CAGR of 12.23% and a 5 Year CAGR of 6.25%. The company clearly is growing at a very slow pace

- Profit After Tax: The PAT has grown faster than the revenues at a 3 Year CAGR of 21.9% and a 5 Year CAGR of 9.62% due to an expansion in the margins

- Margin: From a NPM of 5.47% in FY 11 to a NPM of 6.39% in FY 17, the company has improved its margins without compromising on revenue growth

- EPS: The EPS has grown inline with the PAT as their has not been any dilution in the equity capital

- NOCF: The company generates a lot of cash from its operations which is a very healthy sign.Ratios:

- The company is witnessing an improving ROCE. The ROCE is still lower than what we would ideally want to see.
- The ROE is however at a decent 17.75% level

Note: We have used average shareholders equity for the above computation
- The quick ratio is at a safe level
- The company is debt-free and this is a big positive
- The average debtor days is coming down which shows that the company is able to collect cash faster over time
- The company is able to turn its inventory once is every 27.1 days (13.42 times a year)

The above table is a comparison between Shriram Pistons and Samkrg Pistons. Shriram also makes engine valves which accounts for upto 20% of its revenues. Shriram Pistons & Rings is a Rs 2670 Crore company having revenues of Rs 1,392 Crores for the year ended 31st March, 2016.

Aluminium is the major raw material for the company and constitutes ~ 50% of the net raw material cost of the company and ~ 12% of the revenues. Sales promotion expenses account to roughly 8% of the revenues of the company.

Valuations:

Samkrg Pistons currently trades at a trailing P/E of 12.29 and book value of Rs 94.08 per share. Over the last 4 years, the company has paid out 25% of it's net profits as dividend. The company is generous with dividends. We expect the company's revenues to grow 5% and margins to further improve from 7.18% FY2017(E) to 7.5% FY2019(E) resulting in an increase in EPS from Rs 18.3 per share to Rs 21.08 per share.

Assigning a PE of 15, we come to a price target of Rs 380 over the next 2 years which means a CAGR of 22% p.a.

Margin of Safety:

As per our calculations on the discounted future cash flows of the company, Samkrg Pistons trades at a deep 50% discount to its intrinsic value of Rs 330-335 per share and this gives us a good opportunity make an investment in this stock.

Negatives:
- Top management: The CMD is 83 years old and we could see some leadership changes going forward.
- Not a market leader: Samkrg Pistons is not a market leader in its segment. Its just another player.
- Growth: The company is not a fast growing company and there are no triggers for it to grow faster than 12% p.a. in the medium term (3-4 years)
- Value trap: There is a risk of the stock staying undervalued and not giving any returns or even negative returns over the next 2-3 years.
- Employee Benefit Expenses: EBE was just ~ 11.5% of the revenues in FY2011 and this went up to 23.11% of the revenues in FY2016.

To get access to our cutting edge research reports and profitable investment, visit www.raghavbehani.comand check out our membership plans.

Disclosure: Raghav Behani is a SEBI registered Research Analyst and the stock discussed above may or may not be part of the recommended stocks to clients.